Intel: 4 Reasons To Overlook Disappointing Margin Outlook And Buy The Stock

Shares of Intel Corporation INTC are in the red after cut its full-year margin outlook at its analyst day. But, Michael McConnell of Pacific Crest remains Overweight on the stock, saying the company’s long-term fundamentals are intact.

Intel expects its gross margin to decline modestly over the next three years, due to expectations for higher revenue growth in memory, modems and adjacent products. The chip giant also cut its DCG (Data Center Group) operating margin outlook to the low- to mid-40 percent range from prior range of 45 to 50 percent over 2017 to 2021.

Overlook Disappointing Outlook: Here's Why

McConnell listed out the following four reasons why investors should ignore the disappointing margin outlook:

1. “DCG revenue growth reacceleration from the Purley product cycle should begin in 2H17.”
2. “CCG (Client Computing Group) guidance for a mid-single-digit y/y decline de-risks our model.”
3. “There is optionality on future wireless losses given recent baseband share gains and restructuring initiatives,”
4. ”INTC has an attractive dividend yield of ~2.9 percent.”

The DCG margin cut guidance reflects Intel’s move ramp DCG products first on its next process technology rather than at CCG traditionally, and higher expected mix of non-processor sales within DCG, which carry lower margins.

However, Intel’s next-generation Purley server platform remains on track for a second quarter 2017 launch.

“Additionally, investments in DCG and corresponding growth acceleration in adjacent, non-processor product lines are expected to return DCG to double-digit y/y growth by 2021,” McConnell wrote in a note.

Other Highlights

Additional takeaways of the analyst day included:

• Intel’s TAM should grow to $220 billion in 2021.
• Intel will invest more in DCG and IoT chips.
• Intel says it has a three-year manufacturing lead over competing foundries.
• Intel to ship its first 5G modem this year on 14 nm, and expects shipments in the millions in 2018.
• Intel also expects 14 nm LTE modem shipments in the tens of millions in 2018, which implies retention of share at Apple Inc. AAPL at a minimum.

At last check, shares of Intel were down 0.89 percent to $35.15. McConnell has a price target of $43.